Meet the Bankrates

How Bank of Canada decisions affect the average Canadian family.

How have cuts in the Bank Rate during the past four years affected the average Canadian family? Quite a bit.

In May of 2000, when the U.S. Federal Reserve Board last raised rates to take some of the air out of the Internet bubble, the Bank of Canada's target rate stood at 6.00%. Since then, with a few bumps along the way, it drifted steadily down to 2.75% by January 2004.

This has been good news for Canadian consumers because many of the rates that financial services firms charge their customers are tied directly or indirectly to the Bank Rate. As a result, Canadians have been able to save money on a wide range of products.

For savers, especially seniors living on a fixed income, the picture has been less bright, because the rates paid-out have also dropped.

To illustrate the effect that the interest rate moves have had on the average Canadian family, we have created an imaginary couple, Joe and Jill Bankrate, and given them some typical debts and savings.

' A $150,000 mortgage, with a five year term amortized over 25 years.

' A $40,000 home equity loan payable over 15 years

' A $20,000, 48 month new car loan

' A credit card balance of $7,000 which they intend to pay off over several years.

' A $5,000 one year CD

We compared two sets of rates, one based on recent rates offered by major Canadian financial institutions in January of 2004, and one based on the estimated costs of these loans in May of 2000, before the interest rate reductions came into effect.

The Bankrates' mortgage: $150,000

Mortgage payments, the biggest component of most household budgets, are where interest rate differences are thus most likely to be felt. Although mortgage rates are more directly related to what happens in the bond market, bond yields have come down in recent years and so have mortgage rates.

For example the CIBC's five-year fixed mortgage rate, for a 25 year amortization stood at 8.55% in May of 2000, compared to just 6.05% in January of 2004.

If the Bankrates had waited a few years to finance their mortgage they would have made huge savings.

Total mortgage savings: $241.86 per month or $72,558 over the life of the mortgage

Click here or the latest mortgage rates from Bankrate.ca

The Bankrates home equity loan $40,000


The interest rates on home equity loans, which tend to track the big banks' prime lending rate also have fallen roughly in line with the Bank Rate during the past four years.

Total home equity savings: $77.58 per month or $13,964.40 over the life of the mortgage.

Click here or the latest home equity rates from Bankrate.ca

 

The Bankrates' car loan $20,000

Car loan rates have fallen by roughly 3.25% to 6.75% during the past few years.

The total saving to the Bankrates: $30.64 per month, or $1,470.42 during the life of the loan.

Click here or the latest car loan rates from Bankrate.ca

 

The Bankrates' credit card $7,000

Most standard issue credit card rates remain high and many financial services institutions have not passed along the savings from the low interest rates they pay depositors onto their credit card customers.

There have however been a slew of new card offerings for business and specialty users in recent years and many of these carry lower interest rates, however some compensate by adding usage charges.

Savings to the Bankrates: No change

Click here or the latest mortgage rates from Bankrate.ca

 

The Bankrates' nest egg $5,000

The downside to interest rate cuts is that they also affect the amount of money that banks pay their depositors.

In May of 2000 a ScotiaBank $5,000 GIC, (like those of most of the Big Five Canadian banks) was yielding 4.75%, or $237.50 per year compared to 1.2% (or $60) today, a difference of $177.50

Click here or the latest GIC rates from Bankrate.ca

  May 2000 interest rate May 2000 monthly payment January 2004 interest rate

January 2004

monthly payment

(Monthly payment)

Difference

Mortgage of $150,000, five year term, amortized over 25 years

 

8.55

 

$1,212.90

 

6.05

 

$971.04

$241.86 per month or $72,558 over the life of the loan

Car loan

$20,000 new car loan (48 months)

10.00

507.25

6.75

476.61

$30.64 per month or $1,470.42 over the life of the loan

Credit card loan

$5,000 balance paid off over three years

18.5%

$182.02

18.5%

$182.02

No change

Home equity loan $40,000

15 years

10.75%

$448.38

7.5%

$370.80

$77.58 per month or $13,964.40 over the life of the loan

Home equity LOC

$20,000

paying interest only for 10 years (best credit quality customer)

 

 

7.5%

(prime)

 

 

$125

 

 

4.25%

(prime)

 

 

$70.83

 

$54.17 per month or $6,500.40

over the life of the loan

One year GIC

$5,000

4.75%

$237.50 interest earned per year

1.2%

$60 interest earned per year

Difference

-$177.50 per year

' Sources, CIBC, Scotia Bank and Bankrate.ca estimates

 

Peter Diekmeyer, is the Montreal Gazette's management columnist. He can be reached at: Peter@peterdiekmeyer.com

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